DESCRIPTION OF BUSINESS

Aegion Corporation is a global leader in infrastructure protection and maintenance, providing proprietary technologies and services to: (i) protect against the corrosion of industrial pipelines; (ii) rehabilitate and strengthen water, wastewater, energy and mining piping systems and buildings, bridges, tunnels and waterfront structures; and (iii) utilize integrated professional services in engineering, procurement, construction, maintenance and turnaround services for a broad range of energy related industries. The Company’s business activities include manufacturing, distribution, maintenance, construction, installation, coating and insulation, cathodic protection, research and development and licensing. The Company’s products and services are currently utilized and performed in approximately 80 countries across six continents. The Company believes that the depth and breadth of its products and services platform make Aegion a leading “one-stop” provider for the world’s infrastructure rehabilitation and protection needs.

The Company is primarily built on the premise that it is possible to use technology to extend the structural design life and maintain, if not improve, the performance of infrastructure, mostly pipe. The Company is proving that this expertise can be applied in a variety of markets to protect pipelines in oil, gas, mining, wastewater and water applications and extending this to the rehabilitation and maintenance of commercial structures and the provision of professional services in energy-related industries. Many types of infrastructure must be protected from the corrosive and abrasive materials that pass through or near them. The Company’s expertise in non-disruptive corrosion engineering and abrasion protection is now wide-ranging, opening new markets for growth. The Company has a long history of product development and intellectual property management. The Company manufactures most of the engineered solutions it creates as well as the specialized equipment required to install them. Finally, decades of experience give the Company an advantage in understanding municipal, energy, mining, industrial and commercial customers. Strong customer relationships and brand recognition allow the Company to support the expansion of existing and innovative technologies into new high growth end markets.

The Company originally incorporated in Delaware in 1980 to act as the exclusive United States licensee of the Insituform^® cured-in-place pipe (“CIPP”) process, which Insituform’s founder invented in 1971. The Insituform^® CIPP process served as the first trenchless technology for rehabilitating sewer pipelines and has enabled municipalities and private industry to avoid the extraordinary expense and extreme disruption that can result from conventional “dig-and-replace” methods. For the past 40 years, the Company has maintained its leadership position in the CIPP market from manufacturing to technological innovations and market share.

In order to strengthen the Company’s ability to service the emerging demands of the infrastructure protection market and to better position the Company for sustainable growth, the Company embarked on a diversification strategy in 2009 to expand its product and service portfolio and its geographical reach. Through a series of strategic initiatives and key acquisitions, the Company now possesses a broad portfolio of cost-effective solutions for rehabilitating and maintaining aging or deteriorating infrastructure, protecting new infrastructure from corrosion worldwide and providing integrated professional services in engineering, procurement, construction, maintenance, and turnaround services for oil companies, primarily in the downstream market.

Recognizing that the breadth of offerings expanded beyond the Company’s flagship Insituform^®brand, which constituted less than half of the Company’s revenues in 2011, the Company’s reorganized Insituform Technologies, Inc. (“Insituform”), the parent company at the time, into a new holding company structure in October 2011. Aegion became the new parent company and Insituform became a wholly owned subsidiary of Aegion. Aegion reflects the Company’s mission of extending its leadership capabilities to furnish products and services to provide: (i) long-term protection for water and wastewater pipes, oil and gas pipelines and infrastructure as well as commercial and governmental structures and transportation infrastructure; and (ii) integrated professional services to energy companies.

Acquisitions/Strategic Initiatives/Divestitures

2016 Restructuring

On January 4, 2016, the Company’s board of directors approved a restructuring plan (the “2016 Restructuring”) to reposition Energy Services’ upstream operations in California, right-size Corrosion Protection to compete more effectively and reduce corporate and other operating costs. See Note 16.

Infrastructure Solutions Segment (“Infrastructure Solutions”)

On February 18, 2016, the Company acquired Underground Solutions, Inc. and its subsidiary, Underground Solutions Technologies Group, Inc. (collectively, “Underground Solutions”). See Note 16.

In February 2015, the Company sold its wholly-owned subsidiary, Video Injection - Insituform SAS (“VII”), the Company’s French cured-in-place pipe (“CIPP”) contracting operation, to certain employees of VII. In connection with the sale, the Company entered into a five-year exclusive tube supply agreement whereby VII will purchase liners from Insituform Lining. VII will also be entitled to continue to use its trade name based on a trade mark license granted for the same five-year time period. The sale resulted in a loss of approximately $2.9 million that was recorded to other income (expense) in the Consolidated Statement of Operations during the first quarter of 2015.

In December 2014, the Company sold its wholly-owned subsidiary, Ka-te Insituform AG (“Ka-te”), to the Marco Daetwyler Gruppe AG, a Swiss company, for the sale price of CHF 1.1 million (approximately $1.1 million). In connection with the sale, the Company entered in to a five-year exclusive tube supply agreement whereby Ka-te will source liners from Insituform Linings Ltd. Ka-te will also be entitled to continue to use its trade name based on a trade mark license granted for the same five-year time period. The sale resulted in a loss of approximately $0.5 million that was recorded to other income (expense) in the Consolidated Statement of Operations during the fourth quarter of 2014.

On October 6, 2014, the Company’s board of directors approved a realignment and restructuring plan (the “2014 Restructuring”) which included the decision to exit Insituform’s contracting markets in France, Switzerland, India, Hong Kong, Malaysia and Singapore (see Note 3). The Company has substantially completed all of the aforementioned objectives related to the 2014 Restructuring. See further discussion in Note 2 as to the impact that the 2014 Restructuring had on the Europe and Asia-Pacific goodwill reporting units.

In June 2013, the Company sold its fifty percent (50%) interest in Insituform Rohrsanierungstechniken GmbH (“Insituform-Germany”) to Per Aarsleff A/S, a Danish company (“Aarsleff”). Insituform-Germany, a company that was jointly owned by Aegion and Aarsleff, is active in the business of no-dig pipe rehabilitation in Germany, Slovakia and Hungary. The sale price was €14 million, approximately $18.3 million. The sale resulted in a gain on the sale of approximately $11.3 million (net of $0.5 million of transaction expenses) recorded in other income (expense) on the consolidated statement of operations. In connection with the sale, Insituform-Germany also entered into a tube supply agreement with the Company whereby Insituform-Germany was obligated to purchase on an annual basis at least GBP 2.3 million, approximately $3.6 million, of felt cured-in-place pipe (“CIPP”) liners during the two-year period from June 26, 2013 to June 30, 2015. The parties did not renew the tube supply agreement upon expiration.

Corrosion Protection Segment (“Corrosion Protection”)

On February 1, 2016, the Company sold its fifty-one percent (51%) interest in its Canadian coating joint venture, Bayou Perma-Pipe Canada, Ltd. (“BPPC”) to its joint venture partner. See Note 16.

As part of the 2014 Restructuring, the Company made the decision to shutter two older and redundant fusion bonded epoxy coating plants and consolidate and terminate certain land leases at The Bayou Companies, LLC’s (“Bayou”) Louisiana facility. The actions taken to restructure Bayou’s Louisiana operations allow Bayou to cost effectively meet market demand, for both onshore and offshore projects, by optimizing pipe coating activities and reducing fixed costs. The repositioning of Bayou’s Louisiana facility will also include additional capital investments in the remaining coating facilities over the next two to three years to augment Bayou’s competitive position. See further discussion in Note 2 as to the impact that the 2014 Restructuring had on Bayou’s goodwill reporting unit.

On March 31, 2014, the Company sold its forty-nine percent (49%) interest in Bayou Coating, L.L.C. (“Bayou Coating”) to Stupp Brothers Inc. (“Stupp”), the holder of the remaining fifty-one percent (51%) interest in Bayou Coating. Stupp purchased the interest by exercising an existing option to acquire the Company’s interest in Bayou Coating at a purchase price equal to $9.1 million, which represented forty-nine percent (49%) of the book value of Bayou Coating as of December 31, 2013. Such book value was determined in accordance with the requirements of the joint venture agreement and was based on Bayou Coating’s federal information tax return for 2013 and approximated the Company’s book value of its investment in Bayou Coating as of December 31, 2013. The Company had previously received an indication from Stupp of its intent to exercise such option and, in the second quarter of 2013 in connection with such indication, the Company recognized a non-cash charge of $2.7 million ($1.8 million after tax) related to the goodwill allocated to the joint venture as part of the purchase price accounting associated with the 2009 acquisition of Bayou. The non-cash charge represented the Company’s then current estimate of the difference between the carrying value of the investment on the balance sheet and the amount the Company would receive in connection with the exercise. During the first quarter of 2014, the difference between the Company’s recorded gross equity in earnings of affiliated companies of $1.2 million and the final equity distribution settlement of $0.7 million resulted in a loss of $0.5 million that is recorded in other income (expense) on the consolidated statement of operations.

Prior to March 2014, the Company held a fifty-nine percent (59%) equity interest in Delta Double Jointing, LLC (“Bayou Delta”) through which the Company offers pipe jointing and other services for the steel-coated pipe industry. The remaining forty-one percent (41%) was held by Bayou Coating. On March 31, 2014, the Company acquired this forty-one percent (41%) interest from Bayou Coating by exercising its existing option at a purchase price equal to $0.6 million. As a result, Bayou Delta became a wholly owned subsidiary of the Company.

During the second quarter of 2013, the Company’s Board of Directors approved a plan of liquidation for its Bayou Welding Works (“BWW”) business in an effort to improve the Company’s overall financial performance and align the operations with its long-term strategic initiatives. BWW provided specialty welding and fabrication services from its facility in New Iberia, Louisiana. BWW ceased bidding new work and substantially completed all ongoing projects during the second quarter of 2013. As a result of the closure of BWW, the Company recognized a pre-tax, non-cash charge of $3.9 million ($2.4 million after tax) to reflect the impairment of goodwill and intangible assets. The Company also recognized additional pre-tax, non-cash impairment charges for equipment and other assets of $1.1 million ($0.7 million after tax), which also was recorded in the second quarter of 2013. The Company incurred cash charges to exit the business of approximately $0.1 million on a pre-tax and post-tax basis, which included property, equipment and vehicle lease termination and buyout costs, employee termination benefits and retention incentives, among other ancillary shut-down expenses. During the fourth quarter of 2014, the Company completed final liquidation of BWW. Included within the final liquidation was the settlement of outstanding receivables with a single customer associated with a large fabrication project. The Company also incurred cash charges of $1.4 million related to certain professional fees incurred during dissolution as well as in connection with the settlement discussed above. This resulted in a recorded pre-tax charge of approximately $6.0 million within discontinued operations in 2014.

Energy Services Segment (“Energy Services”)

On March 1, 2015, the Company acquired Schultz Mechanical Contractors, Inc. (“Schultz”), a California corporation, for a total purchase price of $7.7 million. Schultz primarily services customers in California and Arizona and is a provider of piping installations, concrete construction and excavation and trenching services to the upstream and downstream oil and gas markets. Schultz is part of the Company’s Energy Services reportable segment.

On July 1, 2013, the Company acquired Brinderson, L.P., a California limited partnership, General Energy Services, a California corporation, and Brinderson Constructors, Inc., a California corporation (collectively, “Brinderson”). The transaction purchase price was $150.0 million, which resulted in a cash purchase price at closing of $147.6 million after preliminary working capital adjustments and an adjustment to account for cash held in the business at closing. The transaction was funded by borrowings under the Company’s credit facility. During the fourth quarter of 2014, the Company finalized the settlement of negotiated working capital for the Brinderson acquisition as well as escrow claims made pursuant to the purchase agreement. As as a result of the settlement, the Company received proceeds of $5.5 million, $1.0 million of which was recorded as a purchase price adjustment related to working capital and the remaining $4.5 million was recorded as an offset to operating expense in the Consolidated Statement of Operations.

Purchase Price Accounting

The Company accounts for its acquisitions in accordance with FASB ASC 805, Business Combinations. The Company records definite-lived intangible assets at their determined fair value related to customer relationships, trade names and trademarks, patents and other acquired technologies. Acquisitions generally result in goodwill related to, among other things, synergies, acquired workforce, growth opportunities and market potential. The goodwill and definite-lived intangible assets associated with the Schultz and Brinderson acquisitions are deductible for tax purposes. During 2015, the Company substantially completed its accounting for Schultz. As the Company completes its final accounting for the Schultz acquisition, future adjustments related to working capital could occur. During 2014, certain pre-acquisition matters related to the acquisition of Brinderson were identified by the Company where a loss is both probable and reasonably estimable. Accordingly, the Company increased recorded goodwill by $14.5 million. During the fourth quarter of 2014, a final working capital settlement was reached and resulted in a $1.0 million reduction to the purchase price of Brinderson.

The Schultz and Brinderson acquisitions made the following contributions to the Company’s revenues and profits (in thousands):



	Years Ended December 31,
	2015			2014		2013
Revenues	$	339,305		$	305,807	$	108,233
Net income (loss) ^{(1) (2)}	(21,917		)	13,310		4,838

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⁽¹⁾	Net income includes an allocation of corporate expenses that is not necessarily an indication of the entity’s operations on a stand alone basis.


⁽²⁾	Net income for 2015 includes a pre-tax charge for goodwill impairment of $33.5 million ($25.7 million after tax). See Note 2.

The following unaudited pro forma summary presents combined information of the Company as if the Schultz and Brinderson acquisitions had occurred at the beginning of the year preceding their acquisitions (in thousands):



	Years Ended December 31,
	2014			2013
Revenues	$	1,339,147		$	1,199,653
Net income (loss) ⁽¹⁾	(35,304		)	50,384

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⁽¹⁾	Includes pro-forma adjustments for purchase price depreciation and amortization as if those intangibles were recorded as of January 1 of the year preceding the respective acquisition date.

Total cash consideration recorded to acquire Schultz was $6.7 million, which was funded by the Company’s cash reserves. The cash consideration included the purchase price paid at closing of $7.1 million less working capital adjustments of $0.4 million. The total purchase price was $7.7 million, which represented the cash consideration of $6.7 million plus $1.0 million of deferred contingent consideration.

The transaction purchase price to acquire Brinderson was $150.0 million, which included a cash purchase price at closing of $147.6 million after preliminary working capital adjustments and an adjustment to account for cash held in the business at closing. The final working capital settlement with the previous owners resulted in a $1.0 million reduction in purchase price for a final purchase price of $146.6 million.

The following table summarizes the fair value of identified assets and liabilities of the Schultz and Brinderson acquisitions at their acquisition dates (in thousands):



	Schultz			Brinderson
Cash	$	—		$	3,842
Receivables and cost and estimated earnings in excess of billings	1,086			28,353
Prepaid expenses and other current assets	19			655
Property, plant and equipment	162			6,848
Identified intangible assets	3,060			60,210
Other assets	—			1,071
Accounts payable, accrued expenses and billings in excess of cost and estimated earnings	(663		)	(30,622		)
Total identifiable net assets	$	3,664		$	70,357

Total consideration recorded	$	7,662		$	146,605
Less: total identifiable net assets	3,664			70,357
Final purchase price goodwill	$	3,998		$	76,248

The following adjustment was made during the fourth quarter of 2014 relative to the acquisition of Brinderson as the Company completed its purchase price accounting (in thousands):



	Brinderson
Goodwill at December 31, 2013	$	77,248
Decrease in goodwill related to working capital adjustment	(1,000		)
Goodwill at December 31, 2014	$	76,248

During the second quarter of 2014, and in connection with the 2012 acquisition of Fyfe Group LLC’s Asian operations (“Fyfe Asia”), the Company agreed to a working capital settlement with the previous owners, which increased the purchase price and related goodwill by $1.1 million for a final purchase price of $21.1 million (in thousands):



	Fyfe Asia
Goodwill at December 31, 2013	$	20,008
Increase in goodwill related to working capital adjustment	1,098
Goodwill at December 31, 2014	$	21,106